Swiss Franc struggles as US Dollar declines on Fed rate pause expectations

September US housing starts fell and pending home sales hit record lows, dragging down the US Dollar.
Middle East and Ukraine drone attacks pushed oil higher, fueling inflation and December Fed rate hike bets.
Low Swiss interest rates drive carry trades, encouraging investors to sell the Franc for higher-yielding foreign assets.

USD/CHF loses ground for the third consecutive day, trading around 0.8230 during Asian hours on Thursday. The pair depreciates as the US Dollar (USD) faces challenges, as recent economic data pointed to signs of weakness in the US economy, with September housing starts declining and pending home sales falling to a record low.

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According to the CME FedWatch Tool, traders are pricing in an 84% probability that the Fed will hold interest rates steady next week, alongside a 90% chance of a rate hike in December. However, uncertainty persists after Fed Chair Kevin Warsh refrained last week from offering guidance on the timing or necessity of future interest rate hikes.

However, the Greenback may receive support as surging oil prices fuel inflation fears and boost expectations of a Federal Reserve (Fed) rate hike. Oil prices advanced following a drone attack on Saudi Aramco’s Shaybah oil field that resulted in two casualties, intensifying geopolitical friction in the Middle East and raising concerns over potential energy supply disruptions. In tandem, Ukraine executed large-scale drone strikes against critical Russian oil infrastructure this week, signaling Kyiv's intent to impede Moscow's planned expansion of diesel exports under a recent agreement between Presidents Trump and Putin.

The downside for the USD/CHF pair could be limited as the Swiss Franc (CHF) encounters persistent headwinds. This weakness is primarily driven by a widening interest rate differential between the United States and Switzerland, alongside mounting selling pressure stemming from carry trades.

Because market expectations suggest US borrowing costs will stay elevated while Swiss interest rates remain among the lowest globally, the Franc (CHF) has increasingly become an attractive funding currency. As a result, investors are taking out Franc-denominated loans and selling the currency to pivot toward higher-yielding assets, putting consistent downward pressure on the Franc.

Swiss Franc FAQs

What key factors drive the Swiss Franc?

The Swiss Franc (CHF) is Switzerland’s official currency. It is among the top ten most traded currencies globally, reaching volumes that well exceed the size of the Swiss economy. Its value is determined by the broad market sentiment, the country’s economic health or action taken by the Swiss National Bank (SNB), among other factors. Between 2011 and 2015, the Swiss Franc was pegged to the Euro (EUR). The peg was abruptly removed, resulting in a more than 20% increase in the Franc’s value, causing a turmoil in markets. Even though the peg isn’t in force anymore, CHF fortunes tend to be highly correlated with the Euro ones due to the high dependency of the Swiss economy on the neighboring Eurozone.

Why is the Swiss Franc considered a safe-haven currency?

The Swiss Franc (CHF) is considered a safe-haven asset, or a currency that investors tend to buy in times of market stress. This is due to the perceived status of Switzerland in the world: a stable economy, a strong export sector, big central bank reserves or a longstanding political stance towards neutrality in global conflicts make the country’s currency a good choice for investors fleeing from risks. Turbulent times are likely to strengthen CHF value against other currencies that are seen as more risky to invest in.

How do decisions of the Swiss National Bank impact the Swiss Franc?

The Swiss National Bank (SNB) meets four times a year – once every quarter, less than other major central banks – to decide on monetary policy. The bank aims for an annual inflation rate of less than 2%. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame price growth by raising its policy rate. Higher interest rates are generally positive for the Swiss Franc (CHF) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken CHF.

How does economic data influence the value of the Swiss Franc?

Macroeconomic data releases in Switzerland are key to assessing the state of the economy and can impact the Swiss Franc’s (CHF) valuation. The Swiss economy is broadly stable, but any sudden change in economic growth, inflation, current account or the central bank’s currency reserves have the potential to trigger moves in CHF. Generally, high economic growth, low unemployment and high confidence are good for CHF. Conversely, if economic data points to weakening momentum, CHF is likely to depreciate.

How does the Eurozone monetary policy affect the Swiss Franc?

As a small and open economy, Switzerland is heavily dependent on the health of the neighboring Eurozone economies. The broader European Union is Switzerland’s main economic partner and a key political ally, so macroeconomic and monetary policy stability in the Eurozone is essential for Switzerland and, thus, for the Swiss Franc (CHF). With such dependency, some models suggest that the correlation between the fortunes of the Euro (EUR) and the CHF is more than 90%, or close to perfect.